Column : An IMF renaissance

Written by Michael Walton | Michael Walton | Updated: Apr 9 2009, 06:37am hrs
One of the more concrete outcomes of last weeks G-20 meeting was the agreement to substantially increase the resources of the International Monetary Fund. This was featured, including by the IMF itself, as a contribution to the crisis-affected poor of the world. At first sight this is ironic. In much development discourse of the past couple of decades, the IMF has been associated with policies that hurt the poor, through conditionalities that intrusively enforced recession, job cuts and social spending declines, in favour of fiscal stringency, liberalisation, opening of capital accounts, deregulation and privatisation. Thats what used to be called the Washington Consensus. Yet at the summit Prime Minister Gordon Brown pronounced the Washington Consensus dead.

So whats changed Was the old criticism wrong Or has there been a fundamental shift in the drivers of the IMFs behaviour

Consider three things the IMF does. First it provides liquidity to countries who have lost market access. This is in essence a form of smoothing of consumption through bad times. That must be uncontroversially a good thing in a crisis, especially so when the crisis can be a source of irreversible costs to people and firms.

Second, it seeks to ensure the country can pay it back. That sounds reasonable, but this is where things start to get messy. For this involves choices, and the IMF often has particular views: in the East Asian crisis it favoured high interest rates, fiscal retrenchment and deep devaluations. At other times it has swung with intellectual fashion and been keen on hard currency pegs. And to back fiscal retrenchment, the IMF likes to see the detail of expenditure and tax changes, and often has views here too. It is unfair to say that the IMF has any systematic bias towards cuts that hurt the poor: but it will only lend if tax and spending numbers add up to a credible programme consistent with its view on the required aggregate adjustment.

Third, the IMF has often taken seriously the admonition frequently heard in the US these days of never to waste a good crisis. It has often pushed for structural measures, including things like liberalisation, opening of capital accounts, deregulation and privatisation. This is sometimes intellectually coherent, say if state enterprise losses are a source of fiscal deficits. At others, the action is unrelated to the liquidity problem, and more about what IMF staff believe to be good.

There are two issues here. First, reasonable people can, and do, disagree on a whole set of design questions, for example on the feasibility of contracylical fiscal policy, the role of interest rate defenses in a crisis, the extent of subsidies, the pace of liberalisation and capital account opening, and so on. Second, while all this is part of the regular business of decision-making and assessing tradeoffs within countries, the IMF typically comes in with a particular set of viewsbased not on malicious intent, but on a perspective on how the world works and on what is desirable; ideology if you like.

When East Asian countries, including Korea, Indonesia and Thailand, had their crisis in 1997/98, they got the full works, along with high levels of intrusiveness. After that experience, they said never again. Thats one reason why most of Asia has gone for self-insurance through seemingly excessive reserve build up in the past decade.

Are things different now After this crisis, the global consensus has shifted in favour of greater balance between state and market, but it is quite unclear what that will mean in practice. Those fiscal numbers still have to add up. There will be specific judgments as to whether underlying policies support this.

Mexico has been hailed for being the first country to sign up for the new precautionary credit line, designed to provide a facility for countries with sound economies with effectively no policy conditionality. But that is an easy case. If a countrys economy is judged not to be soundand the political economy of many countries in the world favours high deficits and protection of favoured intereststhen choices will have to be made. The IMF will still have to form judgments on the conditions under which it can support lending. Some intrusiveness is unavoidable.

More resources for poorer countries hit by the crisis is highly desirable, whether this is due to real sector shocks or the drying up of private capital flows. The IMF is the main game in town for such short-run action. Governance changes to give more representation to developing countries are surely needed. But the issue is not making the IMF a soft touch for money. It is rather shifting to a narrower focus on liquidity support and the immediate policy supports for this, backed by bringing into the public domain debates over choices on policy design. Greater openness, yes, but hard-headed policy debate cant be avoided.

The author is at the Harvard Kennedy School, the Institute of Economic & Social Change and the Centre for Policy Research